Modelling when to take Social Security and other pensions

[Dash man]

I just got off the phone with Social Security and am officially signed up effective this month. He was very helpful and even took all the information to help get my ex quickly set up when she applied. They’re even sending her a letter encouraging her to apply. My son has been trying to get her to apply because she’s behind on her utility bills. She’s a bit stubborn.

 

[SecondCor521]

That's where I'm at. Going back to my parents (71, 56) and grandparents (93, 66, 65, 61), only one lived past 71. Now at age 62, I am already older than two were when they passed away.

To be fair, in the case of everyone except my 93 year-old grandparent, all had various degrees of failing health for years leading up to their deaths. But family history is not on my side.

I've read variations on this argument several times here before. I don't subscribe to it for the following reasons:

1. The ages of one's immediate ancestors are not particularly predictive of one's own life expectancy, despite it seeming like they should be.

2. Life expectancy is positively correlated with both wealth and educational attainment. Many here are wealthier and have higher educational attainment than our parents and grandparents.

3. Medical technology and medical knowledge have progressed and people are (with the exception of the obesity issue) are living longer on average.

A related anecdote is that my father made the same decision on similar logic. He took SS at 55 because most of the men in his lineage died around 55 or so. He celebrated his 85th birthday a few weeks ago and shows no signs of slowing down.

My Mom, on the other hand, probably should have lived to 95 based on her family history, but she died at 77 due to a random lung disease.

 

[statsman]

I hear you, and I hope you are right. Nothing is guaranteed, but so far, I haven't had any of the serious health issues that parents/grandparents suffered through.

Looked at in a vacuum, many would say to start SS now at 62 because of this history. I've already decided to wait until 65, at which time I likely will start. But I could always change my mind and go out further.

 

[The Cosmic Avenger]

That's where I'm at. Going back to my parents (71, 56) and grandparents (93, 66, 65, 61), only one lived past 71. Now at age 62, I am already older than two were when they passed away.

To be fair, in the case of everyone except my 93 year-old grandparent, all had various degrees of failing health for years leading up to their deaths. But family history is not on my side.

True, although past performance is not a guarantee of future results also applies here, too.

 

[pb4uski]

....A related anecdote is that my father made the same decision on similar logic. He took SS at 55 because most of the men in his lineage died around 55 or so. He celebrated his 85th birthday a few weeks ago and shows no signs of slowing down. ...

Did you mean 65 rather than 55? Or 62?

 

[SecondCor521]

Did you mean 65 rather than 55? Or 62?

Oh, good question.

He retired from his main job about 32 days after his 55th birthday back in 1991; I think that's why I wrote 55 in my previous post.

It looks like the earliest he could have taken SS at that time would have been 62. Early claiming appears to be part of a 1983 SS law (I think the famous Reagan/O'Neill bill).

So he probably took it at age 62. I know he took it at the earliest age possible at the time and chose to accept the discounted amount for early claiming.

 

[Starsky]

It would seem like the deciding factor would be related to how your invested funds are taxed - specifically whether your additional funds are taxable or tax-deferred. For funds that are taxed, waiting could be beneficial since your SWR is only subject to capital gains tax as the cost of doing business.

For tax deferred accounts, the cost can be punishing. Withdrawals are subject to income taxes whenever funds are used. The cost is in both the cost of the tax, and the reduction in health care subsidies from having a higher taxable income. For this reason, my accountant has told me it's better to wait until I can qualify for Medicare before I tap into my IRAs. It's a very good reason to take SS early - and save the problematic IRA for later in life. Right now, our property rentals provide solid cash flow, and amazing tax benefits that keep our taxable income low.

For me, it would seem that taking SS now, and letting funds compound tax-deferred, would provide a benefit that could easily exceed the difference in monthly SS payout over the long-term. Especially, like myself, when entering the SS eligibility window with long-term health issues.

 

[TheWizard]

As far as the deferred tax issue goes, a friend of mine and I have both added a column to our net worth spreadsheets subtracting our deferred tax liability from our current tIRA values. If the value is $1M it's a good reminder to see that $780K (or whatever the current tax rate is) to keep us honest.

That depends on how you figure what retirement income fills up your lower tax brackets.
A single person, for instance, doesn't get into the 22% Federal tax bracket until after $53,000 of AGI.

In my case, my pension/annuity is more than that, so all withdrawals from tax-deferred are taxed at 22% or more, yes...

 

[pb4uski]

It would seem like the deciding factor would be related to how your invested funds are taxed - specifically whether your additional funds are taxable or tax-deferred. For funds that are taxed, waiting could be beneficial since your SWR is only subject to capital gains tax as the cost of doing business.

For tax deferred accounts, the cost can be punishing. Withdrawals are subject to income taxes whenever funds are used. The cost is in both the cost of the tax, and the reduction in health care subsidies from having a higher taxable income. For this reason, my accountant has told me it's better to wait until I can qualify for Medicare before I tap into my IRAs. It's a very good reason to take SS early - and save the problematic IRA for later in life. Right now, our property rentals provide solid cash flow, and amazing tax benefits that keep our taxable income low.

For me, it would seem that taking SS now, and letting funds compound tax-deferred, would provide a benefit that could easily exceed the difference in monthly SS payout over the long-term. Especially, like myself, when entering the SS eligibility window with long-term health issues.

No, the benefit of tax deferral is negligible unless your current tax rate is lower than your future tax rate. Let me use an example. Joe has $10,000 of tax-deferred money, $2,000 of taxable account funds and expects to be subject to 20% in tax... now or later. Option 1 is that he converst the tax-deferred money into a Roth and pays the 20% tax which exhausts his taxable account. The $10,000 Roth doubles over the next 10 years and he has $20,000 available to spend. Alternatively, he doesn't do anything and over the next 10 years the tax-deferred account doubles to $20,000 and the taxable account doubles to $4,000... he withdraws the tax-deferred money, pays the $4,000 in taxes and has $20,000 to spend. Either way, at the end of 10 years he has $20,000 to spend so tax-deferral has no benefit for him.

Where tax deferral is advantageous is where his tax rate today is more than his tax rate later... like if his tax rate was 30% when he deferred the income and is now 20%.

 

[RunningBum]

It would seem like the deciding factor would be related to how your invested funds are taxed - specifically whether your additional funds are taxable or tax-deferred. For funds that are taxed, waiting could be beneficial since your SWR is only subject to capital gains tax as the cost of doing business.

For tax deferred accounts, the cost can be punishing. Withdrawals are subject to income taxes whenever funds are used. The cost is in both the cost of the tax, and the reduction in health care subsidies from having a higher taxable income. For this reason, my accountant has told me it's better to wait until I can qualify for Medicare before I tap into my IRAs. It's a very good reason to take SS early - and save the problematic IRA for later in life. Right now, our property rentals provide solid cash flow, and amazing tax benefits that keep our taxable income low.

For me, it would seem that taking SS now, and letting funds compound tax-deferred, would provide a benefit that could easily exceed the difference in monthly SS payout over the long-term. Especially, like myself, when entering the SS eligibility window with long-term health issues.

I don't think the part I bolded is a valid factor. The full social security benefit (not just taxable SS) is counted in MAGI for ACA subsidy calculations. Whether you get $25K in SS benefits or withdraw $25K from your tIRA, you have the same impact on subsidies. If you're getting enough tax flow from your rentals maybe you don't even need the full social security amount, and you could get a larger subsidy, or use some of that space for Roth conversions.

Also, unless you keep those rentals until you die (and heirs don't lose the stepped-up basis benefit), you've got a ticking income tax bomb coming your way, with huge gains on the sales (to recapture the depreciation that helped keep your taxes low) plus larger RMDs.

You may have other factors like your long-term health issue you mentioned that favor taking at 62, but I don't think you made a good argument in your second paragraph. Maybe you can show me the numbers how that would benefit.

 

[2177V]

Depend on your health and your luck. You do not want to wait until 70 and die of a heart attack at 70-1/2. Collecting at 62 is ok if you always had bad luck and you are not in good health. I decided to collect at 66 so at least I am half way right or half way wrong. I try not to overthink SS and my health was good according to my doctor ....but not excellent. My luck is average since I win 50% and lose 50% at the casinos. Hence collecting at FRA of 66 made sense to me.

 

[RobbieB]

That's been my plan. The year after FRA.

 

[RunningBum]

If I die of a heart attack at 70-1/2 I won't care if I took SS at 62 or 70.

If I live to 95, then I'll care. At least a little bit.

 

[TheWizard]

Depend on your health and your luck. You do not want to wait until 70 and die of a heart attack at 70-1/2. Collecting at 62 is ok if you always had bad luck and you are not in good health. I decided to collect at 66 so at least I am half way right or half way wrong. I try not to overthink SS and my health was good according to my doctor ....but not excellent. My luck is average since I win 50% and lose 50% at the casinos. Hence collecting at FRA of 66 made sense to me.

I agree.
Do not die the year after starting SS...

 

[chassis]

If I die of a heart attack at 70-1/2 I won't care if I took SS at 62 or 70.

If I live to 95, then I'll care. At least a little bit.

I agree with this. What I want to know in the Roth conversion and SS age discussion is - how much will I care?

The litmus test for me is to compare net worth over time. All potential actions, such as Roth conversions and SS claiming age scenarios, need to be calculated in terms of net worth by year. That is the most sensible way in my mind of evaluating the decisions.

SS age claiming is pretty easy to calculate and forecast. Roth conversions are a pain in the backside to calculate, but I am working on it, and making progress.

So far, if there are any advantages to me for a Roth conversion, or delaying SS beyond age 62, they are very small. I think this is the case for a large number of people evaluating these decisions.

 

[SecondCor521]

I agree with this. What I want to know in the Roth conversion and SS age discussion is - how much will I care?

I tried to provide my answer to this question in post #141 on this thread. I think I care about 10 times as much about Roth conversions vs. SS claiming.
But I also noted several limitations to my answer.

Once one has the answer, though, the effort to implement the answer is probably negligible. So for me, if it appears to be worth more than $1K a year or so, I'll probably follow the path I think is best rather than being indifferent or doing something contrary to plan for any non-financial reason (such as feelings or convenience).

 

[harley]

I agree.
Do not die the year after starting SS...

Definitely part of my plan.

 

[RetiredAt55.5]

I agree.
Do not die the year after starting SS...

+2

If this happened to me, I wouldn't be able to live with myself.

 

[VanWinkle]

I agree with this. What I want to know in the Roth conversion and SS age discussion is - how much will I care?

The litmus test for me is to compare net worth over time. All potential actions, such as Roth conversions and SS claiming age scenarios, need to be calculated in terms of net worth by year. That is the most sensible way in my mind of evaluating the decisions.

SS age claiming is pretty easy to calculate and forecast(as long as you know when you will die). Roth conversions are a pain in the backside to calculate, but I am working on it, and making progress.

So far, if there are any advantages to me for a Roth conversion, or delaying SS beyond age 62, they are very small. I think this is the case for a large number of people evaluating these decisions.

See my thought above on how easy it is to claim SS

 

[Kabowest]

Here's something I've been working on after seeing someone else's SS spreadsheet. I was trying to help the non-mathematially inclined visualize the impact that taking SS late or early or at FRA would have over the years. I've tweaked it quite a bit after showing it to a few non-mathematically inclined loved ones, now you can put in your estimated benefit and see your own projections.

https://docs.google.com/spreadsheets/d/1UjBqWxGYEc3OO82G9Q4o6wJWWZYK6yfv50gQxglq8II/edit?usp=sharing

Thanks for posting the spreadsheet. I compared to the following online calculator and it aligns almost exactly.

https://www.broadridgeadvisor.com/w...2B43874C29C0AF0D2980F883DBE1C54C30B832ECA46AF

 

[chassis]

@brianjone5 How are you coming along on your decision?

Has the site come to the unanimous conclusion that taking SS at 62 and taking pensions as lump sums, if offered, are the best choices?

 

[statsman]

Has the site come to the unanimous conclusion that taking SS at 62 and taking pensions as lump sums, if offered, are the best choices?

Can't imagine anything here being unanimous. I would bet there's a wide distribution of choices of when to take SS. It really depends on the individual/couple.

As far as taking pensions as a lump sum (when offered), I had that choice, but my Megacorp offered less than 45% of the annuity value. Very few in my position would have taken the lump sum.

 

[qwerty3656]

@brianjone5 How are you coming along on your decision?

Has the site come to the unanimous conclusion that taking SS at 62 and taking pensions as lump sums, if offered, are the best choices?

If anything, I think the "site" is more on the wait til 70 side

 

[ERD50]

@brianjone5 How are you coming along on your decision?

Has the site come to the unanimous conclusion that taking SS at 62 and taking pensions as lump sums, if offered, are the best choices?

Did you forget to put a 'smiley' or "LOL" emoticon on that post?

-ERD50

 

[Romer]

I enjoyed reading through this thread. What I like is all the different perspectives. I think hearing different peoples perspectives and opinions is more insightful then if everyone is in agreement.

Someone on here made a very wise statement. You don't have to make the when decision now unless it is at 62. You can go on year by year or even month by month evaluating based on your situation and decide when to make the plunge

Everyone's situation is different. Opensocialsecurity.com is a great site and recommended I take it at 70 with my wife at 66. She should then file for spousal support at 70. The difference though was around $100K over lifetime taking it at 65 vs 70 per their model.

I then modeled in my spread sheet 4 scenarios, 62, 65, 67, and 70 with my wife taking hers at 67. All had spousal benefits

I assumed tax rates would go up in 2026

I looked at a very conservative ROI of 2.5%

I included my pension

I added my RMDs based on projected balances to the IRS table

There are several years I can live on pension and cash so I can do Roth Conversions to 12%.

Other scenarios showed different curves and break even points, but this one showed taking it at 65 was best up until age 91, and then 67 and 70 were better. In the scenario where I did not do Roth's and didn't live off of cash for a few years, the breakeven was 83-85

Yes I modeled to age 110, I am optimistic

So what am I going to do with this data? I am 60 so I will relook at it every year. If it still shows the same thing at 62 then I will wait and relook every year until I decide to file. I don't take this as the absolute truth, but it does suggest taking Roth's to 12% will reduce my RMDs which will reduce my tax burden. That isn't the decider, but a variable to when I should take SS

Taking SS at 62 doesn't give me those few years to live off of cash is what I see to maximize my Roth contribution to 12%. I don't have enough cash to do this past 64 so why 65 starts looking good.

That's just me and one scenario I could go down. Other scenarios change the answer, but I don't have to make the decision now and can wait and see what the market does and how much I spend over the next few years.